CURB URGED ON THRIFT CONVERSIONS

By Jerry KnightBy Jerry KnightOctober 18, 1990

Federal thrift regulators and congressional banking leaders are pressing Congress to close a loophole in last year's savings and loan cleanup law that permits thrifts to escape a federal ban on using depositors' funds for a wide range of investments that have proven to be highly risky.

The S&Ls in some states have found they can get around the investment restrictions imposed by Congress last year by converting themselves from savings and loan associations into savings banks, a peculiar kind of hybrid financial institution that is part bank and part S&L.

The savings banks won a special exemption last year when Congress prohibited thrifts from buying junk bonds, speculating in real estate and making other high-risk investments.

At the time, that exemption drew little notice because only about a dozen states permit savings banks, and there were fewer than 500 of them, compared with more than 12,000 banks and thrifts.

Now, however, savings and loan associations in a number of states are seeking to take advantage of the looser rules that apply to savings banks.

The National Council of Savings Institutions and the U.S. League of Savings Institutions are both lobbying to permit the conversion of thrifts to savings banks, as is the Council of State Savings Supervisors.

Switching charters is not meant to evade federal regulations, they argue, and is one of the few ways an S&L can survive the collapse of the thrift industry.

In states that already allow savings banks, many S&Ls are trying to convert themselves into savings banks by getting a new charter from state regulators.

In several other states, thrift industry lobbyists are trying to change state banking laws to permit creation of savings banks for the first time.

The state legislatures in Illinois and Louisiana have passed new laws permitting savings bank in the last few weeks, and at least nine other states -- including Texas, Florida and California -- are considering similar legislation.

T. Timothy Ryan, director of the Office of Thrift Supervision, tried unsuccessfully to persuade Illinois Gov. James Thompson to veto legislation creating state savings banks and is urging Congress to ban S&Ls from converting to savings banks.

The switches are "blatant attempts to evade reforms" adopted last year in the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), Ryan argued.

"We know that state officials, their trade associations and lawyers are advertising state savings bank charters as a quick, easy way to evade FIRREA," Ryan said Tuesday in a speech to the Mortgage Bankers Association of America.

Yesterday, OTS general counsel Harris Weinstein issued a ruling that the regulatory agency had the authority to prohibit thrifts from switching charters, even if state regulators approve the change.

But OTS's legal authority to override state regulators is likely to be challenged in the courts, and Ryan is urging Congress to stop all conversions. Legislation to do that was introduced yesterday by Senate Banking Committee Chairman Donald Riegle (D-Mich.) and Sen. Jake Garn (R -Utah), the committee's ranking R epublican.

Similar measures are being pushed in the House Banking Committee by Reps. Bruce Vento (D-Minn.), Frank Annunzio (D-Ill.) and Jim Leach (R-Iowa.)